A new rule to make all financial advisers adhere to your best interests when providing help with retirement accounts received a green light from a North Texas district judge last week.
But that doesn’t mean clear sailing to April 10, the effective date for the U.S. Department of Labor’s new fiduciary rule. Earlier this month, President Donald Trump has told the department to review the fiduciary rule, and on Feb. 8 the Department of Justice requested a delay until the review is done.
Heralded as an important ally for consumers seeking retirement investment advice, the rule would require brokers and insurance agents to act in their clients’ best interests, following the same rules already required by certified financial planners and other investment professionals.
Currently, brokers must adhere to the “suitability” standard, which requires that they make recommendations that are suitable to a client’s personal situation, but does not require the advice be in the client’s best interest.
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The distinction is important, said Harold Evensky, who co-wrote the fiduciary rule as a member of the Committee for the Fiduciary Standard.
Evensky, who is known as the “Dean of Financial Planning,” is a graduate adjunct professor of wealth management at Texas Tech University and chairman of Evensky & Katz/Foldes Financial, a Coral Gables, Fla., firm with $1.5 billion in assets under management.
“Suitability is a caveat emptor [buyer beware] standard,” Evensky said. “The broker is under no obligation to put the clients’ interest first and no obligation to disclose how he gets paid. The investment may be suitable, but not necessarily the best.”
Under a fiduciary rule, the client’s interest is first, which eliminates conflict of interest, and the adviser must disclose all fees.
“With the fiduciary rule, the buck stops with the adviser,” Evensky said.
The new rule is designed to better protect consumers as the nation makes a dramatic shift from defined benefit pension plans, covered by a fiduciary rule, to consumer-controlled options such as IRAs and 401(k) plans that may be advised by brokers. The new rule would affect $7.5 trillion in IRAs and $7 trillion in other defined contribution plans.
The Feb. 8 ruling was the third by a federal judge in favor of keeping the rule moving forward, despite challenges from the U.S. Chamber of Commerce and insurance associations
“There have been three major court battles, and they lost all of them,” said Evensky.
Given the current political climate, however, the court rulings may not be enough to stop a delay of the new rule, he said.
“There is a high probability they will be able to delay it,” Evensky said. “If delayed, then down the road, the rule is probably dead.”
But that doesn’t mean the rule may not roll out as a distinctive marketing tool in the competitive investment industry, Evensky said.
“Some of the major brokerage houses have already implemented the new fiduciary rule,” he said. “This is reality. This is the future. It puts those who don’t in a poor marketing position.”
Already, Merrill Lynch announced last fall that the rule is “great news for investors” and that it will change some of its practices to be in compliance. Among the major changes, the brokerage house will change from commission to fee-based structure on all new IRA accounts.
Other brokers have been working toward compliance for the April 10 deadline, even with uncertainty over whether the rule will be affective starting on that date.
Until the courts and the federal government sort out the path for the fiduciary rule going forward, Evensky suggests consumers take a Fiduciary Oath created by his committee to their financial adviser and ask them to sign and date it.
The oath reads:
Putting Our Clients Interest First
We believe in placing our clients’ best interest first. Therefore, we commit to the five following principals:
1. We will always put our clients’ best interest first.
2. We will always act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
3. We will not mislead clients, and we will provide conspicuous, full and fair disclosure of all important facts.
4. We will avoid conflicts of interest.
5,. We will fully disclose, and fairly manage, in our clients’ favor, any unavoidable conflicts of interest.
If your adviser won’t sign the oath, Evensky suggests not walking, but running away.
Teresa McUsic’s column appears Saturdays. TMcUsic@SavvyConsumer.net
Checking out advisers
▪ Consider an adviser who charges an hourly fee or percentage of your assets. Fee-only advisers can be found at the National Association of Personal Financial Advisors at www.napfa.org.
▪ Do a background check with regulators. For registered investment advisers, go to www.SEC.gov or the Texas State Securities Board at www.ssb.texas.gov; for brokers go to the Financial Industry Regulatory Authority at www.finra.org.
▪ Have a direct conversation about fees and conflicts of interest with your adviser.